Top 10 at 10: South Canterbury losses?; China bubble to pop?; Mad Butcher vs Chrisco; Dilberts

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please email your suggestions for Tuesday's Top 10 at 10 to bernard.hickey@interest.co.nz 1. New losses for South Canterbury? - David Hillary has highlighted in his 'Lost Soul' blog the potential for more losses at South Canterbury Finance that would cause it to breach the capital adequacy requirements in its prospectus. The most interesting bit is the disclosure from the Sunday Star Times that three prominent Auckland bars (Lenin, Minus5 and O'Carrolls Irish Pub) were put into receivership by South Canterbury Finance last week. What on earth was Allan Hubbard lending money to a bunch of Viaduct bar owners?

Any more losses will put SCF in breach of its capital adequacy requirements in its trust deed (see p 23 of the prospectus), unless the company can book profits from other sources to offset the losses. The lack of provisioning calls into question whether the accounts of SCF, after 30 June 2009, are true and fair, and whether SCF is engaging in accounting trickery to avoid breaching its trust deed and to keep the trustee off its back. However, stories of SCF losses have been emerging since 9 days after it registered its prospectus:

1. On 29th Oct 2009, it was reported 'South Canterbury Finance is the third-biggest PGC shareholder with just over 4 per cent, preserving its previous more than 4 per cent stake by taking part in the rights issue.' On 30th June 2009 the shares in PGC closed at $2.03, today they are about $0.48, and the rights were not of significant value. This translates to about $6.4m in losses for South Canterbury Finance on this shareholding.
2. On Friday November 13th, the front page story in the National Business Review (paper edition) provided a story about South Canterbury Finance subsidiary Face Finance repossessing three helicopters of Auckland company Heliflight (a fourth was crashed damaged). Helicopters aren't cheap, and although these helicopters, used for pilot training are probably at the cheaper end of the market, they could cost about $300k each. 'Mr McKay [Heliflight Managing Director] told NBR he decided to sell Heliflight as a going concern in July after his wife fell sick. He said he had a deal on the table but Face Finance "hijacked" the process and proceeded to try to sell the Whitireia contract and the helicopters to another buyer. That never eventuated.'
3. Today's Sunday Star Times (15 November), has an article by Greg Ninness titled Kiwi pubs hard hit by the recession, where it was reported: Meanwhile, problems in the hospitality sector have highlighted the riskier lending practices of South Canterbury Finance. Although SCF likes to promote itself as being mainly involved in so-called heartland industries such as farming, recent collapses have exposed the company as a significant player in the bar and pub business, which is regarded as high-risk even in good times.As well as being the major secured lender for the Lenin, Minus 5 and O'Carroll's bars which went into receivership last week, SCF was the major financier of the Cargo restaurant and bar chain which was tipped into receivership in July. The company operated 12 outlets around the country, including the Boiler Room and Minus 5 in Queenstown and Merivale Ale House in Christchurch. The receivers' report shows the company had debts of $10.1m, with $7.8m owed to SCF.

So, it appears that, SCF although it has stopped making provisions for bad loans, hasn't stopped experiencing bad loans. Withreceiverships in early November, one has to ask why there were no provisions in July, August, September or October before the 20th?

2. Hear hear - Brian Gaynor hammered away again at the Securities Commission in his NZHerald column on the weekend, pointing out that our watchdog seems to have ceded its role to Consumer magazine and that it failed in its monitoring of Hanover Finance. Too right.

The important issue here is that the industry's main regulator, the Securities Commission, continues to allow companies to make optimistic and unrealistic comments in the front sections of a statutory document even though these statements are inconsistent with the main body of the report.

The integrity of these statutory documents is extremely important because shareholders and directors of insolvent companies will nearly always prefer a moratorium over receivership. This is because a receiver can take legal action against former directors, whereas there is far less prospect of a legal action under a moratorium.

Hanover, its shareholders and directors were particularly susceptible to legal action because of the $86.5 million of dividends paid in the two years to June 30 last year. The moratorium vote almost certainly removed the prospect of any legal action in relation to these huge dividend payments.

3. Astonishing stories - My favourite television programme at the moment is Save our Home. It's a TVNZ reality show where couples who are on the verge of losing their homes because of big debts are coached on how to save their homes. Last week's episode featured a wealthy Auckland couple who had binged on debt with an investment property and an overpriced section. It's the colour of the stories I love. You get to see what people really think about debt (we love it!) and property. It's on Wednesday nights at 8pm on TVOne. Congrats to the producers, who are providing a real service to the nation.

Lisa and Stu are bright enough to be big earners, but are clueless about their cash outflow, and they've just made a mistake with a section they can't afford.

4. Hampsta vs Chrisco - Rob Stock at the Sunday Star Times has an excellent backgrounder on the dramas in the Christmas hamper market in New Zealand. New entrant Hampsta (The Mad Butcher) is very grumpy about Chrisco and vice versa, it seems.

The Mad Butcher, a driving force behind the launch of Hampsta in August last year, alleges Chrisco's 2010 meat hampers cost between 44% and 56% more than they would at its stores. Competition between Chrisco and Hampsta has since become intense. The newcomer energetically denounces its rival at every opportunity while Bradley portrays Hampsta as a gadfly. Hampsta, which offers a pre-paid debit card, had an opportunity for more sniping when Chrisco launched a pre-paid Visa card in response before Visa approved it. (Mad Butcher CEO) Morton was still sniping last week. "We talk to their suppliers, so we know they are hurting."

5. Lobbyists win - It shouldn't surprise anyone who looks closely at the US political system, but this piece in The Nation on how Wall St corrupted the latest legislation on deriviatives reform is still an eyeopener. HT Gertraud via email.

The "reform" legislation approved by the House Financial Services Committee on October 15 is a fiesta of exemptions, exceptions and twisted legalese that effectively defeat the original purpose. Only experts can divine the actual meaning of the bill's densely worded provisions, and many of them have reacted with disgust. Who drafted this dubious piece of legislation? Bankers (or their lawyers) did. The leading sellers of derivatives are an exclusive club of five very large financial institutions--Citigroup, JPMorgan Chase, Bank of America, Morgan Stanley and Goldman Sachs--that hold 95 percent of the derivatives exposure among the largest banks (the total contract value exceeds $290 trillion). These are the same folks who toppled the global economy and compelled government to intervene with gigantic bailouts. Michael Greenberger, a University of Maryland law professor and veteran federal regulator, studied the House committee's 187-page bill and detected the fine needlework of Wall Street lawyers. "It had to be written by someone inside the banks," Greenberger said, "because buried every few pages is a tricky and devilish 'exception.' It would greatly surprise me if these poison pills originated from anyone on Capitol Hill or the Treasury." A well-informed Congressional source confirmed that the original language in the draft legislation was written by financial-industry experts. It "was probably written by JPMorgan and Goldman Sachs," he told me, "and possibly the Chicago Mercantile Exchange."

6. China collapse ? - The conventional wisdom is that China will pull the world out of recession and will power strong growth in commodity producing countries such as Australia, our largest trading partner. But Eamon Javers at Politico.com highlights a view from billionaire hedge fund investor Jim Chanos (the guy who blew the whistle on Enron) that China's growth is false and vulnerable to collapse. HT Gertraud via email.

There's a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse. Chanos and the other bears point to several key pieces of evidence that China is heading for a crash. First, they point to the enormous Chinese economic stimulus effort "” with the government spending $900 billion to prop up a $4.3 trillion economy. "Yet China's economy, for all the stimulus it has received in 11 months, is underperforming," Gordon Chang, author of "The Coming Collapse of China," wrote in Forbes at the end of October. "More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent." Chang argues that inconsistencies in Chinese official statistics "” like the surging numbers for car sales but flat statistics for gasoline consumption "” indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth. Another data point cited by the bears: overcapacity. For example, the Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined. This, Chanos and others argue, is happening in sector after sector in the Chinese economy. And that means the Chinese are in danger of producing huge quantities of goods and products that they will be unable to sell. The Pivot Capital report was extremely popular in Chanos's office and concluded, "We believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the U.S. subprime and housing boom."

7. Double down - Paul Krugman is now suggesting a second stimulus programme to spend US$300 billion to boost employment, Calculated Risk reports. 8. Chinese blockages - Alan Kohler at BusinessSpectator has an interesting view on why China might not manage a smooth transition from export powerhouse to consumption powerhouse. Here's his conclusion:

So, two things need to happen at once for a dramatic increase in Chinese consumption: corporate ownership reforms that would force more profits to be distributed to the people and more political democracy so that the Chinese leadership is driven to distribute more money in the form of welfare transfers.

In other words the unelected political and corporate elites of China are hoarding the cash. Unless they let go of it, China won't become a consumer society. And with the export model dead, that means lower growth and lower commodity imports.

9. No Fed hike until after 2011 - Rolfe Winkler at Reuters points out that the Fed's promise to keep rates low for an extended period might last until after 2011. I agree with his conclusions here.

I've argued in this space many times that the Fed is trapped. Our monetary system, which is fueled by credit expansion, simply doesn't work in reverse. To avoid deflation, credit must always be expanding in the aggregate. If the private sector won't borrow, the public sector must"¦.and vice versa. If they de-lever in tandem, we get deflation. We're told to be panicked by the prospect of deflation and yet the solution we've been given "” unprecedented public credit expansion + inflation of new asset bubble "” leaves us worse off than when we started. Alan Greenspan's 1% interest rates inflated a disastrous credit bubble. We think 0% rates and quantitative easing will lead to a different result?

10. For no good reason - The Onion asks if Americans should close down the national money hole. My favourite line is when the lady who likes the money hole says she loves it when gasoline is poured into the hole with the money and set alight. In The Know: Should The Government Stop Dumping Money Into A Giant Hole?